Recession Proofing Is Now Key for $12 Billion Credit Manager

(Bloomberg) -- Credit hedge fund manager Capital Four is insulating its portfolios against the near certainty of a recession.

That means that junk bond investors must make sure they get paid enough for the increased risk of defaults, according to the Copenhagen-based manager.

“The likelihood that we have a recession in the next five years is very high, probably higher than 80-90 percent,” Sandro Naef, chief executive officer at Capital Four, said by phone on Monday. “So everything that we buy now has to be recession proof.”

After years of growth, high-yield bonds funds saw outflows in February as volatility returned. The Bloomberg Barclays Pan-European High Yield Index has risen about 35 percent in the past five years. But as a recession is coming closer, risk looms over companies that may struggle to service their debt.

Capital Four is only buying companies that compensate for a higher default rate and is focusing on less cyclical industries, said Naef, who oversees about 10 billion euro ($12 billion).

“Do you want to squeeze the last drop out until the moment when everything turns around?” he said. “Or do you position yourself more and more toward that you’re going do to well if there’s a correction. We position ourselves more and more toward doing well if things aren’t developing favorably.”

The hedge fund Credit Opportunities, which closed at the end of February, has an expected beta to the high-yield market of 0.1-0.2. The fund is long leveraged loans and individual credits while it’s shorting iTraxx Crossover to hedge credit risk. The fund’s annualized return since start in 2010 is 13 percent and it has delivered 1 percent so far this year.

Capital Four is planning to launch a new private debt fund this spring to invest in mid-sized companies and sponsors in European primary markets. It will be called the Strategic Credit Fund II and have a 10 percent return target.

To contact the reporter on this story: Jonas Cho Walsgard in Oslo at jchowalsgard@bloomberg.net.

To contact the editors responsible for this story: Jonas Bergman at jbergman@bloomberg.net, Stephen Treloar